Disputes between shareholders can significantly disrupt a company’s operations and damage shareholder value, particularly where minority shareholders are concerned. When disagreements escalate to the point where one or more shareholders feel their interests have been undermined by those in control, an unfair prejudice claim may provide a remedy.

Given the potential complexity and cost of these claims, early advice is essential. At ARC Costs, we support clients and law firms involved in shareholder disputes by providing expert costs advice and improving recoverability throughout the process. Our expertise ensures that costs budgets are accurate, proportionate, and compliant with court requirements.

What is unfair prejudice?

Unfair prejudice refers to a situation in which the rights or interests of a minority shareholder or a specific class of shareholders in a company are adversely affected or harmed by the actions or decisions of the majority shareholders, the company’s directors, or the company itself.

A key distinction between unfair prejudice claims and other forms of corporate litigation lies in the nature of the harm alleged. Unlike derivative claims, which seek to redress wrongs done to the company itself, unfair prejudice petitions are brought by shareholders in a personal capacity.

This remedy exists to protect shareholders from abuse of power, exclusion from management, or financial disadvantage, especially in private companies where the shares are not publicly traded and there may be no easy way for a shareholder to exit or sell their interest.

Key aspects of unfair prejudice include:

Prejudicial conduct:

Unfair prejudice may arise from conduct that is considered detrimental, unjust, or prejudicial to the interests of the minority shareholders. This conduct can take various forms, such as exclusion from decision-making, diversion of corporate opportunities for personal gain, or actions that amount to unfair prejudice and unfairly impact the value of the minority shareholders’ investment. In quasi partnerships, such behaviour often violates the mutual trust upon which the company was formed.

The courts assess whether the conduct in question is both unfair and prejudicial, meaning it must be more than mere mismanagement or poor business decisions – it must breach the standards of fairness expected in the relationship between shareholders.

Subjective element:

Unfair prejudice is a subjective concept, meaning that it depends on the specific circumstances of each case. What constitutes unfair prejudice can vary based on factors such as the terms of shareholder agreements, the company’s articles of association, and common law principles. For example, breaches of fiduciary duty by directors or exclusion from participation in company’s affairs may be deemed unfair.

Legal framework:

In jurisdictions like England and Wales, legal provisions, such as Section 996 of the Companies Act 2006, provide a statutory basis for members of a company to bring a claim for unfair prejudice. This legal remedy allows minority shareholders to seek redress from the courts when they believe that their rights have been unfairly compromised.

Making an unfair prejudice claim

An unfair prejudice claim is a legal remedy available to minority shareholders who believe that their interests have been unfairly prejudiced by the actions of the majority shareholders or the company itself.

This type of claim arises under Section 994 of the Companies Act 2006, and it provides a mechanism for minority shareholders to seek redress when they believe that the affairs of the company are being conducted in a manner that is unfairly prejudicial to their interests. The process acts as a practical guide to bring an unfair prejudice petition.

Key features of an unfair prejudice claim include:

Grounds for claim:

A minority shareholder may bring an unfair prejudice claim if they can demonstrate that the actions or decisions of the majority shareholders or the company have amounted to unfair prejudice against their interests. This can include breaches of fiduciary duty, mismanagement of the company’s affairs, or other conduct that alleges unfair treatment.

Unfairly prejudicial conduct:

The conduct that can give rise to an unfair prejudice claim is broad and may include actions such as diverting company assets for personal benefit, conducting the affairs of the company in a manner that disregards the minority shareholders’ interests, breaches of a shareholder agreement, or failure in requiring the company to operate fairly and transparently.

Section 996 of the Companies Act 2006:

The statutory basis for unfair prejudice claims is primarily found in Section 994 (formerly Section 459) and Section 996 of the Companies Act 2006. These sections provide framework for the court to bring an unfair prejudice petition and to grant relief where appropriate.

Petition for unfair prejudice:

The process begins with the minority shareholder filing an unfair prejudice petition with the court. The petition outlines the alleged unfair prejudicial conduct and requests appropriate remedies. In certain circumstances, petitioners may require the leave of the court to proceed.

Remedies:

If a court finds unfair prejudice under Section 996 of the Companies Act 2006, it can grant various remedies, including:

• Share Buyout: The most common remedy. The majority may be ordered to buy the minority’s shares at fair value, often without a minority discount.
• Regulating Company Affairs: The court can direct changes to how the company is run, e.g., restoring management rights or improving transparency.
• Specific Orders: Courts can reverse unfair share issues, enforce agreements, or reinstate directors.
• Undoing Transactions: Prejudicial actions like improper share allotments or asset transfers can be reversed.
• Winding-Up: Rare, but possible if relationships have broken down completely.
• Declarations/Damages: Occasionally used, but most compensation is through fair share valuation. 

Respondents to the petition:

Respondents to an unfair prejudice petition may include majority shareholders, directors, or the company itself. Majority shareholders are often named where they have used their control to exclude minority shareholders, manipulate shareholdings, or divert company assets. Directors may also be included if their actions—such as breaching fiduciary duties or mismanaging the company—contributed to the unfair conduct.

The company is usually named as a nominal respondent, particularly where the court’s remedy requires action by the company, such as buying out shares or reversing transactions. The court assesses each case individually and considers the role of each respondent in the alleged unfair prejudice. Even passive parties may be included if they benefited from or allowed the conduct to occur.

Member of a company:

The right to bring an unfair prejudice claim is not limited to shareholders but extends to other members of the company, such as debenture holders and those who hold a specific interest in the company.

Unfair prejudice claims play a crucial role in safeguarding the rights of minority shareholders and maintaining the principles of fairness and equality in the corporate governance of a company.

These prejudice claims provide a legal avenue for addressing grievances arising from actions that are detrimental to the legitimate interests of minority stakeholders. 

How can ARC assist? 

ARC Costs maintains an extensive legal network of expert commercial litigation solicitors with a track record of success on these types of cases. We would be happy to pass on your details to assist in your unfair prejudice claim. 

In addition to introducing you to a solicitor, we can also assist in the recovery and negotiation of legal costs in shareholder dispute cases, whether you are the paying or receiving party.

ARC Costs are highly experienced in advising and assisting with costs issues and disputes in different areas of law. As Costs Draftsman and Costs Lawyers, we can assist you with your commercial litigation costs issues.

Should you wish to discuss your costs query with us, please contact us on 01204 397302 or via email at info@arccosts.co.uk. Alternatively, you can complete our online query form, and we will contact you to discuss your query further. We can provide expert legal advice on costs in our free, no obligation initial consultation.

We may receive payments from third party solicitors on our panel to whom we may refer your claim. We will never charge you for any referrals made to our panel of third parties.